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August 20, 2008

Tesco May Lose Milk Price War As Industry Set to Rebel

by Sam Savage

By Dan Buglass Rural

TEN days ago Tesco suddenly announced that it was to cut the retail price of a two-litre pack of Wiseman's Fresh 'n' Low milk from GBP 1.44 to GBP 1.06, much to the surprise of the dairy industry. Inevitably all of Tesco's rivals have followed suit, sparking genuine fears of a price war, with farmers being the ultimate losers at a time when they have been arguing for an appreciably higher ex-farm price.

Tesco and its competitors are claiming that farmers will not suffer from the reduction in retail prices, but this cuts little ice with Gywn Jones of the NFU of England and Wales.

He said: "The retailers are fervently denying that their actions will be felt by farmers in any way, but I am not convinced. Not only does this create a difficult climate for negotiating autumn milk price increases, but puts real pressure on farmers who fear that the supermarkets will be looking for cuts in the longer-term

"This time, however, the industry will be ready. We will not lie in wait for the inevitable margin slashing that we still bear the scars of. We have been calling for better contracts in the dairy industry, which offer greater clarity, transparency and stability for dairy farmers."

Willie Lamont, the chairman of NFU Scotland's milk committee, reckons that Tesco and its rivals can comfortably absorb the reduction in margins resulting from the price cuts in supermarkets without hitting producers.

He added: "However, the soaring cost of fuel, animal feed and fertiliser means that farmers cannot live with a status quo on milk price. They need a significant increase in the farm gate price, they need it now and that will be very difficult to achieve.

"Little over a year ago Tesco announced its intention to source all its own label milk requirements from a dedicated pool of dairy farmers - Tesco's Sustainable Dairy Group (TSDG) and to pay those producers a sustainable price.

"That relationship now appears to have been undermined by Tesco's pricing policy whereby they are selling another company's branded product at a significant discount to its own milk. Farmers on a contract deserve a full and frank explanation from the retailer as to how the situation affects them."

A spokesman for Tesco, speaking to The Scotsman yesterday, commented: "In the current economic climate [retail] customers are telling us that they want a range of products which will help to ease some of the financial pressure they are facing. We believe that we can deliver this without any impact on the farm gate price we offer to TSDG producers."

However, Ian Potter, a leading industry analyst, is far from convinced and makes it clear that he fears that there will be little upward price movement for farmers. He said: "Initiatives like this are designed to drive volume and we must hope that Wiseman cannot source the milk that Tesco requires and consequently has to abandon the promotion. The first line losers on this promotion will be all those farmers currently contracted on core and balancing contracts that should give them a small bonus.

"They may as well sell their milk elsewhere. The alternative scenario does not bear contemplation; namely that the discounters such as Aldi and Lidl drop their prices still more to make milk more attractive. If this happens, everyone will jump into the ring and slash prices further.

"Let's hope it's a huge success and all involved run out of milk. The bottom line is that it appears as if Tesco doesn't care what happens to the ex-farm price and do not care what happens to the UK dairy industry."

A spokesperson for Dairy Farmers of Scotland, a small but highly influential group of large producers, said: "The impact will cause not just a ripple throughout the industry but a potential tsunami with devastating effects."

Consumers may well enjoy the short-term benefits of a price war among the supermarkets and discounters, but the fact is that dairy farmers simply cannot afford to produce milk at less than 30p per litre- many are only being paid little over 26p. The classified sections of the specialist farming press give a clear indication of what is likely to happen over the next few months - huge numbers of dairy cows will be dispersed. Equally worrying in the short-term for committed dairy farmers is the lack of suitable staff willing to milk cows. If producers cannot attract quality staff, then the cows will be sold and milk will become scarce.